Financial Risk Management Market Risk Measurement

Question 1

What does Value at Risk (VaR) measure?

Accepted Answer

The maximum loss not exceeded at a given confidence level over a specified period

Answer

The average loss over a one-year horizon

Answer

The total market capitalization of a portfolio

Answer

The minimum expected return of a portfolio

Question 2

Which method of VaR calculation uses the actual historical returns of a portfolio?

Accepted Answer

Historical simulation

Answer

Monte Carlo simulation

Answer

Parametric (variance-covariance) method

Answer

Stress testing

Question 3

What is the main limitation of VaR as a risk measure?

Accepted Answer

It does not capture losses beyond the confidence threshold (tail risk)

Answer

It is too complex to calculate

Answer

It always overstates losses

Answer

It cannot be applied to derivatives

Question 4

Expected Shortfall (ES), also called CVaR, measures which of the following?

Accepted Answer

The average loss given that the loss exceeds the VaR threshold

Answer

The most likely loss in a normal market day

Answer

The standard deviation of daily portfolio returns

Answer

The probability that a loss exceeds a specified level

Question 5

Delta-normal VaR assumes portfolio returns follow which distribution?

Accepted Answer

Normal (Gaussian) distribution

Answer

Poisson distribution

Answer

Log-normal distribution

Answer

Uniform distribution

Question 6

Which risk metric is required by the Basel III/IV internal models approach to replace VaR?

Accepted Answer

Expected Shortfall (ES) at 97.5%

Answer

Conditional VaR (CVaR)

Answer

Stress VaR at 99%

Answer

Maximum Drawdown